Ratings firms call in the cavalry as US CLO volume soars

Kristen Haunss

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NEW YORK, July 12 (LPC) - Ratings firms are calling in reinforcements from Europe and other asset classes to help rate US Collateralized Loan Obligation (CLO) funds, as the frenetic pace of issuance outstrips resources and pushes pricing wider.

The US CLO market is on track for a record year after more than US$66bn of issuance in the first six months of 2018, which is 27% higher than the same period in 2017, according to Thomson Reuters LPC Collateral data. Another US$79bn of deals was also reworked or reissued in the first half of 2018.

Wells Fargo is forecasting a record US$150bn of issuance, which would surpass the previous high watermark of US$123.6bn in 2014, as investors seek floating-rate assets to hedge against rising US interest rates.

To keep up with demand, both Moody’s Investors Service and Fitch Ratings have enlisted help from London-based analysts to rate US CLOs, and colleagues working in other asset classes with CLO experience are being reassigned, according to the ratings firms.

“We have continued to add appropriate resources in order to maintain the high quality standards that market participants expect from Moody’s,” a firm spokesperson said.

Heavy new-issue volume and busy refinancing and reset activity is putting pressure on resources across the market – from arranging banks to the rating agencies – which is creating delays and affecting pricing, according to Lauren Basmadjian, senior portfolio manager at Octagon Credit Investors.

“The volume is creating a bottleneck, which is pushing spreads wider,” she said.

Although spreads have widened under the weight of issuance, JP Morgan says coupons on Triple A tranches could drop below 90bp by the end of the year, as CLOs try to reduce their liability costs, which could spur further issuance in the second half.

Fitch has also reallocated employees, hired more staff and in May set up a new, dedicated US ratings team based in London led by Laurent Chane-Kon, a senior director at Fitch, according to Kevin Kendra, head of Fitch’s US structured credit group.

The ratings firm in March started reallocating members of its structured credit surveillance team, which is responsible for monitoring all ratings and also helps with research, to focus on resets, he said. The result is the group has had to cut back on some research initiatives to handle the volume, he said.

It is “really an all-hands effort to try to make sure we meeting all of our commitments,” Kendra said.

A Standard & Poor’s spokesperson declined to comment on how the ratings firm has dealt with the increased CLO volume.

As the ratings firms adapt to increased activity, the US CLO market does not show any signs of stopping.

“There is just a ton of supply and people are trying to work through this,” said Jason Merrill, structured specialist at Penn Mutual Asset Management. (Reporting by Kristen Haunss Editing by Tessa Walsh)